Blu-ray Still Too Much, Too Late to Save Hollywood

Sales of Blu-ray players this year are expected to more than double last year’s total, fueled by deep discounting in the fourth quarter and aggressive promotion by retailers and hardware makers. That has the studios thinking hopefully about the first quarter of 2010, when all those new players bought over the holidays come online and new Blu-ray owners start to build their high-def libraries.

Too bad it’s not 2005.

For all the hype around Blu-ray lately, the format will deliver only $1. 3 billion in revenue to the studios this year, according to Adams Media Research, barely 14 percent of total disc sales and less than half what DVD brought in at a comparable point in its roll-out. “We’re sanguine about Blu-ray taking over as the physical disc format of choice,” Tom Adams told the New York Times. That’s swell, but if all Blu-ray accomplishes is taking market share from a fading format, it’s still a net loss to the studios.

The critical strategic issue facing the studios at the time the industry started planning for a high-def disc format was figuring out how to maintain the then-current level of consumer spending on packaged media — Hollywood’s most important revenue stream — while they figured out how to make money in digital distribution. The DVD format was clearly nearing the top of its maturation curve, based on historical patterns, and unless something was done to jolt the business, the natural direction of the spending curve would be downward.

High-def was the obvious place to look for such a jolt, but timing and cost would be critical. The studios needed to catch the first wave of consumer upgrades to HD displays, when the new appetite for HD content could have fueled a parallel upgrade cycle in disc players, and they needed to avoid adding significant cost to the system, either for themselves or for consumers.

As it happened, the industry had come up with a format that delivered on those two criteria: Toshiba’s HD DVD format. Unfortunately, that wasn’t the only format it came up with. The three-year Blu-ray/HD DVD format war caused the studios to miss the natural upgrade cycle by delaying consumer purchases, and in the end the industry settled on the more costly of the two formats. Double bogie.

The result has been predictable. While the industry dithered, consumer spending on packaged media began to decline in 2006 and is now in free-fall. While Blu-ray may be increasing its market share vs. DVD, it’s done little to influence the most important metric: total consumer spending.

Now, the industry is hoping 3-D will bail out its investment in Blu-ray. The Blu-ray Disc Association is expected to announce a 3-D technical spec this week at its meeting in San Diego. But it will be at least another year, and probably longer, before hardware makers will have 3D-capable players on the market.

Hollywood is hoping that James Cameron’s upcoming “Avatar” will ignite consumer interest in 3-D at home when it reaches Blu-ray sometime in 2011, giving new impetus to the format. But that may be a bigger gamble than than $500 million it cost to produce the movie. Like Blu-ray itself, 3-D Blu-ray is an attempt by the studios to engineer their way to a solution to a strategic problem. It didn’t work the first time around with Blu-ray, and doubling down isn’t likely to make it work any better.

Here’s the problem: Consumer spending on movies is shifting from high-margin packaged goods to low-margin digital services. Better packaged goods technology in the form of Blu-ray has done little to arrest that shift. The solution the studios should be focused on is not how improve Blu-ray technology, but how to align their own business model with the realities of consumer spending.

Question of the week

What should the studios do to try to slow the decline in consumer spending on DVD and Blu-ray?

Great closing paragraph and I couldn’t agree more. If consumers aren’t spending one place, they’re spending somewhere else. If studios look at why consumers are spending on digital, they will find the challenge consumers are trying to solve. These include everything from saving space in their living room (for avid movie fans with 500 DVDs) to conveniently streaming movies instead of driving to rent a hard copy. They can either adapt their model to address these consumer challenges or they can find the faults of digital media and get a little more life out of the current model. For example, hard copies are still desirable because of the quality of the picture, it’s not overly difficult to set up a player and insert a DVD, new titles may be available first in hard copy or many people might just like to have the “real thing” if they give it as a wrapped gift or so they feel like they own it a little more.